Bankruptcy is not the only option for someone in severe debt there is another option which people should be aware of namely the consumer proposal.
Whereas in a bankruptcy your assets are assigned to a trustee (subject to exemptions) who then liquidates them to pay your unsecured creditors, this is not the case for a consumer proposal. The consumer proposal, under the Bankruptcy and Insolvency Act, is an offer to pay your secured creditors an agreed amount of money to extinguish your debts and thus avoid bankruptcy. This money is paid interest free over a period of up to 5 years.
When a consumer proposal is filed 3 major things happen:
- Interest stops on your debts
- Your assets are protected from the creditors and a stay of proceedings is in place
- Creditors can no longer contact you by phone or mail or any other means
So long as you keep up the payments your assets are protected under the Act. This option is usually the preference for people with savings or equity in their house or for small business owners who need to protect their business assets to maintain an income. If three payments are missed then the proposal is annulled and you are back to where you started!
Consumer proposals do adversely affect credit and are reported to the Equifax and Transunion credit bureaus until 3 years after the proposal is paid off. One option to speed up credit building is to pay off the proposal earlier which will remove it from the credit bureau earlier.
Other advantages of the consumer proposal over bankruptcy are:
- If your income increases during a proposal the payments to the creditors does not. In a bankruptcy your income is monitored and payments to creditors adjusted accordingly
- Inheritances and windfalls are kept whereas in a bankruptcy these are paid to the creditors.
- You can still be a director of a company whereas in a bankruptcy you cannot
- You can still sponsor someone into Canada, in a bankruptcy you cannot do this until discharged.
- There is the opportunity to rebuild your credit faster by paying off your proposal early
Bankruptcy is not the end of the world as some people may believe and may be seen as a good opportunity to press the reset button and start again. Even if there are assets which may be seized in a bankruptcy the debtor usually has the option to pay additional funds in lieu of the asset value.